I was, until recently, Economics Editor of The Telegraph. You can find my book - 50 Economics Ideas You Really Need to Know - here.

Will the Bank soon be buying houses?

Just back from Fathom Consulting’s latest quarterly press conference, which since its inaugural event earlier this year has become a must-attend event in the economic calendar. The idea behind it is to give an independent assessment of the state of the economy ahead of the Bank of England’s Inflation Report (next week). To this end, Fathom use an adapted version of the Bank’s economic model (BEQM) and work out what its next moves may be. The analysis is often instructive: last time around, it was comments from Charles Goodhart at the Fathom event which sparked speculation (still ongoing) that the Bank may impose an extra charge on banks for leaving too much cash in reserve at the central bank.

So what are the key highlights this time around? Well, first off let’s start with Fathom’s own forecasts, and the one-word description for them is: “miserable”. It expects the economy to turn in a meagre GDP growth of 0.1pc next year, implying that the recession could continue well into 2010. It anticipates inflation staying low and subdued, picking up slightly next year (as a result partly of the VAT increase) but dropping back to beneath 1pc in 2011. In short, it all sounds rather like Japan – long, subdued quasi-recovery, made worse by the “headwinds” created by fiscal tightening, falling consumer spending and an increasing savings rate. Indeed, Fathom thinks the savings ratio could hit 12pc, saying: “We found that, in order to return UK household debt to 100pc of disposable income by 2018, the saving rate would need to rise to 12pc over the next two years and remain there until 2018. This implies that, by 2010, the level of consumption would be 10pc lower than it would have been in an alternative environment where the saving rate had not risen from its average level through 2008.”

The main points from the panellists – Deanne Julius, Willem Buiter and Charles Goodhart (all former members of the Monetary Policy Committee):

1. Fathom’s forecasts are too bearish.

The economy is at least starting to rebound (the recovery has been “miraculous”, with the stimulus helping the UK avoid a re-run of the 1930s, according to Goodhart). Julius said Fathom’s view on the savings ratio rising to 12pc looked “too pessimistic”, and the latest GDP stats from the US might seem to bear her out: they suggest that American consumers have taken to borrowing again in spite of the economic pressures facing them.

2. More QE please

All three panel members (and indeed Fathom itself) are in favour of the Bank extending its Quantitative Easing programme beyond the current ceiling of £175bn – most likely by a further £25bn – BUT that it should start buying up private sector assets rather than government debt (gilts). It is an interesting point: so far, the Bank has spent £173bn on gilts and a grand total of £2bn on commercial paper and corporate bonds. As Buiter said: “The bank has wasted £150bn purchasing gilts for no good reason… [why not buy other stuff] and dump some gilts back on the market to remind the Treasury what they’re up against.”

Given that when it unveiled the programme the intention was to spend about £50bn on private debt, it is indeed peculiar that the Bank hasn’t spent more on these other assets. Why has it done so? The Bank’s explanation is that there simply isn’t enough of the stuff out there. A more convincing explanation, expounded by members of the panel, is that the Bank is overly cautious, both in terms of devising unconventional means of buying the stuff and in terms of how much risk it is willing to take on. Fathom’s suggestion is that it buys actual houses and bank shares. These, it judges, are the kind of items which are most in need of support (although the recent rebound in both might argue otherwise). Others suggest it follows the Federal Reserve’s lead and buys semi-toxic stuff like mortgage backed securities.

3. Scepticism over the official data on Q3 GDP

The ONS figures showed a decline of 0.4pc, meaning the UK is still in recession. The panel members thought, broadly speaking, that this was overstating the decline. Buiter said: “it’s random noise… The likelihood is that things are slightly better”. After all, employment grew in Q3 – something that’s hard to reconcile with falling output.

However, Fathom itself takes the official data more seriously than the purchasing managers’ indices (which have been far more bullish, including some strong manufacturing data again today). It says: “we chose to place some weight on the best estimate of the official statistics body which samples 30,000-35,000 firms every month in a consistent and statistically rigorous manner; over that of one specific private survey of fewer than 2000 firms, with no track record over even one economic cycle.” Ouch.

4. Time for a fiscal slash-and-burn.

Fathom suggested in its forecasts that it would be dangerous to slash spending or raise taxes too soon, suggesting delaying it until 2012 – a challenge to the Tories. However, the panel indicated in broad terms that although this was right – and that the retrenchment would mean more pain – it was probably not feasible (given the market’s concern about any government’s willingness to cut). So the next government has little choice other than to slash the budget or face a “collapse” (Goodhart’s words) in the gilts and foreign exchange market.

What measures would make sense? Variously:

- hold an emergency budget after the election

- Raise VAT to 20pc in around a year’s time (Buiter)

- Don’t renew Trident

- Raise the pension age

- Slash public sector pay and pensions

- Pledge to keep to strict expenditure limits (Julius)

There were other interesting issues, among them another discussion of whether a penalty should be charged on reserves (A: yes, but don’t expect it to be the silver bullet) and Buiter questioned why the Bank rate couldn’t come down to zero rather than being stuck up at 0.5pc. Lots of interesting food for thought, anyway, ahead of what will be a fascinating MPC meeting and Inflation Report respectively this week and next.